Chemical Industry Improving Business Margins by 15% by managing Cross Currency Exposure effectively

• A leading Chemical company is in the business of exporting and importing chemicals products.
• It had import exposure in EUR/GBP and export exposure in USD. They did not realize the gap between exports and imports. Over and above, Buyers and Suppliers kept changing in different currencies.
• The company was hedging FX exposure with the notion that it was a Natural Hedge.
• The client has exposed himself to cross-currency risk, i.e., vulnerability to adverse movement in EUR/USD and USD INR. On and off, the company had exposures in GBP/USD and USD INR too.

Challenge and Observation

• Unaware of the cross-currency exposure: Changes in correlation pose significant risks. There were phases in which EUR/USD and USD/INR moved together, and the Indian rupee’s correlation with USD and vis-a-vis USD correlations with other cross currencies went haywire. The company had difficulty calculating and capturing exposures which lead to overhedging or under hedging at times. They also ended covering a different currency, whereas the exposure was to another currency.
• Gap management: There was also a timing mismatch between the import and export exposures, which they did not consider. They ended up paying a difference of 12% on their import exposure when both USDINR and EUR/USD moved against the company during COVID times. They could not pass the cost to their buyers hence suffered losses in multiple transactions.
• Calculations: The team was unable to make the calculations needed and record the exposures. They did not book both exposures EUR/USD and USD/INR separately with the banks. They were using a traditional way of securing their FX exposure which often was not suitable. They ended up paying more margins also in the forwards. They were unaware of the global developments determining the moves in Euro and Pound. 

Process

• IFA Global analyzed the payment cycles of exports & imports, studied the currencies and their quantum of exposures.
• IFA Global developed the Risk Management Policy after understanding detailed business cycles, cash flow, banking, risk limits, etc. 
• Monthly Systems were set so proper P&L of FX transactions were ascertained based on benchmark and market rates.
• IFA Global prescribed multiple hedging strategies, making sure clients bank limitations, premium paying budgets, ISDA documents, Forward booking tenure, Overnight desks, etc.
• We implemented accurate recording of multiple currencies with LIVE updating and Mark to Market of outstanding transactions. 

Outcome

• The risk was reduced to a single currency wherever possible, reducing the need to hedge numerous currencies.
• The promoters could channelize their efforts towards business strategy rather than focusing on Forex risk management.
• Overall the company improved its EBIT margins by 15% by implementing proper risk management and also got appreciation from the board. Above all, some of the savings were for a lifetime.

Which IFA Global Services did the Chemical Manufacturer had subscribed to :

• Treasury Outsourcing Services with Monthly Board Reviews.
• Treasury Audit Services.
• Treasury Software for Live MTM.